Thursday, October 30, 2008

Guambat Mrs the point

Guambat was reading the liberal, anti-Palin LA Times and suddenly realized they uniformly referred to her, not as Gov. Palin, but as Ms. Palin. Not Mrs. Palin, Ms. Palin. Seemed odd, Guambat thought, that a happily married woman of avowed conservative family value would be referred to as "Ms.". "Mrs." would be more appropriate, he thought. Even if you don't like her politics, respect is the stuff that keeps us from each others' throats.

Turns out Guambat, as usual, is slow on the uptake of this, and others have noticed and chimed in.

At least one feminist blog thought it unfair, to the extent that Hilary was referred to as Mrs. Clinton, but Sarah got the preferred Ms. designation. But, the blogger discovered the NYT style protocol defaults to the Ms. courtesy title unless and until they are advised that madam prefers Mrs. She seemed willing to live with that, even though, "I find it rather ironic that the avowed feminist here — Hillary Clinton — prefers the title of Mrs., while conservative Sarah Palin prefers a title made popular by the very feminists whose political gains she wants to overturn."

And, at least one conservative website is incensed and considers the use of Ms. Palin to be a purposeful slight. Guambat reckons they ought to call out and censor stories like this: What Should Ms. Palin Have Done?

Guambat's objection is having to type the "period" after any such courtesy title. Back in Australia, they don't use a "full stop" in the title; i.e., Mr Ms Mrs.

Ooops, that last one is the full stop for the sentence, not the title. Period.

Guambat is positive he's MISSing something here.

Now he understands when Mrs Guambat just looks at him pitifully and says, "it's complicated".

The first step in forming a new AIP?

Evidently, Sarah-ha-ha-ha is plannin' on steppin' out. But is she really plannin' on formin' her own Alaskans for an Independent Palin (AIP, but not this AIP) party? And will Todd cross over to join her?

Palin said she would never wave a "white flag of surrender against some of the political shots that we've taken" (from Breaking: Palin's 2012 Talk Leaves McCain Aide Speechless (CNN) by Ari Melber):
Now to be accurate, it sounds like Palin was stressing that she is a fighter in general -- unaffected by all the "political shots" -- not that she's convening focus groups for her next bid. Yet CNN is playing it up as a larger declaration, as you can see in the clip below, and ABC started the fire with the headline "Sarah Palin Vows to Remain Player in 2012: 'Not Doing This For Naught.'"

Whether any of this means she is steppin' out, or steppin' on toes or just steppin' fetchit, Guambat hasn't a clue.

But it is a statement of fightin' words that would make Joe Volger mighty damn proud of her.

And if you want to hear any of his words, recorded directly from his own interviews, spend some time at this website, which describes the interview:
In this interview, Joe Vogler talks with interviewer Margaret Van Cleve about his life in Alaska and the interests which led to the formation of the Alaska Independence Party. This interview was made as a part of the "On the Road" series, sponsored by British Petroleum. It was not made for the Yukon-Charley oral history project, but since Vogler discusses his experiences with the Park Service at his mining claims at Woodchopper Creek, this interview has been included , with Joe Vogler's permission, in the Yukon-Charley Oral History Project.

Guambat rather enjoys the orneriness of the vulgar views he had of the US, but reckons it ain't much of a role model for a US President. For Guambat's money, old Joe was a salmon out of water, a grizzly hard to bear, a kayak with a stern. Guambat suspects there is a good reason old Joe was from Nebraska and did not die in it. After all, Guambat is far from his own birthplace, too. But respectfully so.

Search and ye shall be found out

Guambat gets so precious few hits on his hit-o-meter that he often takes time to view them. The hit usually looks like it is simply the result of being one of multitudes of results that pop up from someone's search query. And oftentimes those other results are quite interesting.

For instance, the google search "amaranth jp morgan hogan" turned up a pdf copy of the complaint in the lawsuit Amaranth filed against JP Morgan. Whether the complaint is truth or fiction, treated even as fiction, it is fascinatingly written, and far from the formal pleading Guambat was accustomed to from his legal writing class over 30 years ago.

For instance, is this straight out of a paperback quick-read from a airport book stall or what?
(you may want to click on this extract to enlarge it, if your eyes are anything like Guambat's):

Guambat was also interested to have a curiosity satisfied. When he posted on the Amaranth fall out, noting that Citadel and Morgan reportedly started with the deal jointly but Morgan left hurriedly and very profitably, leaving Citadel with the left-overs, Guambat wondered "if JPMorgan had some kind of bridging put arrangement all along."

Paragraphs 21 and 22 of the complaint says, "you betcha".

Another search result mentioned that Morgan denied the lawsuit as "an effort to rewrite history".

Would that other rewrites were so well written.

Yet another fascinating piece of history that popped up as a result of that seach was the minutes of meeting of Members of the CSFI Advisory Council on October 23, 2006, of the London based Centre for the Study of Financial Innovation.

One of the items discussed had to do with the replacement of banks by hedge funds as intermediaries of risk. And how prescient was this?:
We need to look at what a recession might do to the new structure of the financial services industry. McKee agreed; one casualty, he suggested, are the so-called “London rules” for orderly debt restructuring. For the first time, lots of banks may well have a financial interest in a firm going bust.

One particular area of concern was the mortgage market – especially in the US (though that always seems a good predictor of problems in the UK). It was pointed out that 40% of US mortgages have zero equity, and that 40% are not for primary residences. Both the US and UK banking systems are very heavily dependent on mortgage business; what happens if it goes wrong?

Continuing with their penchant for asking the right questions, but not disclosing if they came up with any right answers, was this item:
4. International capital markets – particularly the sense that the US is losing business as a result of SarbOx. Is London really winning? How realistic is it to expect a rollback of SarbOx?

Plender noted that the PCAOB is now saying that the drift away from US markets started in 1996, ie that it predated SarbOx. On the other hand, Joe Coffey insisted that SarbOx is a major reason for the success of AIM – at least, he added, “that is
what US companies say”. They say it is just too difficult to raise money in New York.
That prompted Plender to ask whether it is too easy to raise money in London. Are here too many Russian mining companies in London? Are our standards now too low? “Is London the new Vancouver?” And will there be a blow-up?
You may want to give the group a bit of a sticky-beak. The topics of their meetings, which you get by clicking the "Minutes" link on their left side-bar, look quite engaging.

Wednesday, October 29, 2008

Well, being commie socialists, they would, wouldn't they

Russia Tosses Life Preserver to One of Its Richest Men
The Kremlin is stepping in to bail out one of the country's richest men, in what could be the first move in a shakeout among the powerful businessmen known as oligarchs, whose holdings are spread throughout the Russian and world economies.

But that could never happen in America, would it? That kind of wealth redistribution just is unthinkable here.

Isn't it?

BUT seriously, folks, Most Presidents Ignore the Constitution
The $700 billion bailout of large banks that Congress recently enacted runs afoul of virtually all these constitutional principles. It directly benefits a few, not everyone. We already know that the favored banks that received cash from taxpayers have used it to retire their own debt. It is private welfare. It violates the principle of equal protection: Why help Bank of America and not Lehman Brothers? It permits federal ownership of assets or debt that puts the government at odds with others in the free market. It permits the government to tilt the playing field to favor its patrons (like J.P. Morgan Chase, in which it has invested taxpayer dollars) and to disfavor those who compete with its patrons (like the perfectly lawful hedge funds which will not have the taxpayers relieve their debts).

Perhaps the only public agreement that Jefferson and Hamilton had about the Constitution was that the federal Treasury would be raided and the free market would expire if the Treasury became a public trough. If it does, the voters will send to Congress those whom they expect will fleece the Treasury for them. That's why the Founders wrote such strict legislating and spending limitations into the Constitution.

Everyone in government takes an oath to uphold the Constitution. But few do so. Do the people we send to the federal government recognize any limits today on Congress's power to legislate? The answer is: Yes, their own perception of whatever they can get away with.

Mr. Napolitano, who served on the bench of the Superior Court of New Jersey between 1987 and 1995, is the senior judicial analyst at the Fox News Channel. His latest book is "A Nation of Sheep" (Nelson, 2007).

When Porsche came to shove

It seems the consensus that purposeful clandestine opaqueness in the derivatives trade (hard to call it a market, at least in the modern "organized" market terms) is one of the root causes of the rooting the financial markets have taken of late. It was that character that allowed fast money to push around almost any traded commodity or index, up or down, over the last decade at least, as mentioned here.

How ironic, then, that users of that strategic tool to push down on VW stock are crying foul, though, in fairness to them, they are right; if transparency is said to be good for the goose, it ought to be good for the gander.

This is the story, as told in How Porsche took the wind out of the hedge funds' sails:
The auto industry around the world has been one of the hardest hit by the turmoil in financial markets. For instance, the "Detroit-Three" – Chrysler, Ford and General Motors – are in line to receive emergency funding from the American government. Meanwhile VW shares have traded far above the fair value generally agreed by analysts.

Shorting the [VW] ordinary shares and buying preference shares has been one of the most popular trades for months, according to banking sources. But the traders didn't know that Porsche was building a secret stake in its rival.

Rather than acquiring the shares directly – which would have to have been disclosed – Porsche acquired cash settled call options from a group of investment banks. Under German rules, neither the banks – which all held 4.99pc or less – nor Porsche were under any obligation to declare the stake.

Shortly after 3pm on Sunday, Porsche slipped out its bombshell – in German. So it took a while for hedge fund managers to comprehend the significance.

Porsche said it was letting the market know "to give short-sellers the opportunity to close their positions unhurriedly and without bigger risk''.

But the biggest short squeeze in recent memory was about to take place instead.

As soon as the markets opened on Monday, hedge funds and investment banks' proprietary trading desks scrambled to cover their short positions. The demand for stock sent the shares soaring, increasing the losses on the short positions and forcing others that had hoped to hang on to become forced buyers too.

All day yesterday, the panic to get out compounded the situation: at one stage, VW temporarily became the world's biggest company by market value.

As the losses have grown, so has the indignation. The hedge funds feel unfairly caught out. VW has been a popular "short".

Porsche's movement has sparked calls of foul play. "The regulator needs to investigate," Piers Hillier, head of European equities at WestLB Mellon Asset Management, told Bloomberg. "The bigger question has to be why they have not done so already. Porsche's stake-building process is at best obscure."

Porsche vehemently rejects the accusations. "The ones responsible are those that speculated with huge sums of money on a falling Volkswagen share price," said a spokesman.

One trader said: "This sort of behaviour by a public company wouldn't be allowed in the UK or US. But we can't expect help from the German authorities – this is pay back."

The German establishment has made little secret of its contempt for the high-rolling industry, with one senior politician referring to the sector as locusts"./blockquote>

Nobel name dropping

One of Guambat's mentors recently related to him a long held secret: he recognized a bit late that he had too much propensity to be awed by brushes with famed names, such as Nobel prize-winning associates.

But he shouldn't be too hard on himself. As socialized creatures, we're designed to go along with consensus leaders. Guambat wonders how many lemmings, for instance, even bother to curse their leaders when they're half way down the cliffside. Most probably never even bother.

It's only the survivors who complain, and that is how we ended up with term limits for legislatures and executives; at least in the public sector.

Another example of one with this propensity is Alan Greenspan, as reported by Floyd Norris in a recent NYT blog post:
The former chairman of the Federal Reserve Board — the man who kept telling us that there was no need to regulate credit default swaps because the banks could do a fine job of it themselves — even cites the Nobel prize committee in his defense:

“In recent decades, a vast risk management and pricing system has evolved, combining the best insights of mathematicians and finance experts supported by major advances in computer and communications technology. A Nobel Prize was awarded for the discovery of the pricing model that underpins much of the advance in derivatives markets. This modern risk management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year because the data inputted into the risk management models generally covered only the past two decades, a period of euphoria. Had instead the models been fitted more appropriately to historic periods of stress, capital requirements would have been much higher and the financial world would be in far better shape today, in my judgment.”

Mr. Greenspan is right on one thing. The “whole intellectual edifice” collapsed. But he is wrong to blame it solely on the wrong inputs. It is too bad that Mr. Greenspan never appreciated the work of Hyman Minsky, who understood that stability is destabilizing, and that there will come times when the very calmness of markets, and lack of apparent risk, causes investors to take ever greater and greater risks.

What was missing was a regulator who understood markets, rather than worshiped them.

Guambat reckons the problem with economics and its financial modeling spin-offs is that it keeps trying to force a roundish human peg into a square economic hole.

Like other morality-driven institutions, holding sway as some fount of religion or other righteousness, economics fails to take account for humans as they are found.

They forget that "should" is a precatory notion.

Tuesday, October 28, 2008

Exporting its way INTO economic crisis

The way most economies have, in modern times going back a couple of centuries or more, managed to improve their economic lot is to export. That is, to sell their stuff to "foreigners", escaping the limitations of their own markets and capturing the wealth of other nations.

There are limitations on this approach that economics doesn't capture, but business school case studies should, such as where the product exported contains melamine, pirated intellectual property and other short cuts that human kind too willingly fall into. Those kinds of exports have often backfired, but, like Wall Streets quarterly reporting incentives, it works pretty good for a while at the micro level even if the macro picture fades.

Indeed, Magellan dubbed Guam (or, Guhan as it was also known then) as the Isle de la Ladrones, or Island of Thieves, in part because the natives simply took the rope and iron bits they could off his boats, but also because, as generations of subsequent European captains and sailors discovered, when they did trade for things, the natives often gave false measure by weighing down their baskets of foodstuffs with rocks.

That name stuck on maps for a many years until the Spanish missionaries, desiring to curry the favor of the Court, named the island group the Marianas, after the Queen.

But Guambat digresses. Again.

The original idea for this idea came from Bloomberg, which has a fantastic story with great historical context told in a You Are There sort of way. You should read the whole story for the juicy details and the persons behind the scenes. Kudos to Mark Pittman who wrote it. Excerpts follow:

Evil Wall Street Exports Boomed With `Fools' Born to Buy Debt
The bundling of consumer loans and home mortgages into packages of securities -- a process known as securitization -- was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001

The growth over the past decade was made possible by overseas banks, which saw the profits U.S. financial institutions were making and coveted the made-in-America technology, much as consumers around the world craved other emblems of American ingenuity from Coca-Cola to Hollywood movies.

"Securitization was based on the premise that a fool was born every minute," Joseph Stiglitz, a professor of economics at Columbia University in New York, told a congressional committee on Oct. 21. "Globalization meant that there was a global landscape on which they could search for those fools -- and they found them everywhere."

European banks, in particular, were eager adopters. Securitizations in Europe increased almost sixfold between 2000 and 2007, from 78 billion euros ($98 billion) to 453 billion euros

In Japan, Mizuho Financial Group Inc., the nation's third- largest bank, acquired an entire structured-finance team, which proceeded to lose $6 billion issuing mortgage-backed securities.

The damage reaches all the way to Australia, where the town council of Wingecarribee

Securitization is a shadow banking system that funds most of the world's credit cards, car purchases, leveraged buyouts and, for a while, subprime mortgages. The system, which pools loans and slices up the risk of default, made borrowing cheaper for everyone, creating a debt culture that put credit cards in wallets from Seoul to Sao Paolo and enabled people to buy luxury cars and homes. It also pumped out record profits for banks, accounting for as much as one-fifth of their revenue over the last decade.

Beginning about three years ago, investment banks revved the system's engine to boost earnings. They raised revenue by funding more subprime mortgages and cut costs by relying increasingly on the $4.2 trillion sitting in U.S. money-market funds. As it turned out, those decisions would prove fatal.

Before the invention of securitization, banks loaned money, received payments and profited from the difference between what the borrower paid and the bank's funding cost.

During the mid-1980s, mortgage-bond traders at Salomon Brothers devised a method of lending without using capital, a technique at the heart of securitization. It works by taking anything that has regular payments -- mortgages, car loans, aircraft leases, music royalties -- and channeling the money to a trust that pays bondholders principal and interest.

Securitization's biggest innovation was off-balance-sheet accounting. If a bank couldn't sell a bond or didn't want to, the asset could be sold to a trust within a so-called special- purpose entity, incorporated in a place such as the Cayman Islands or Dublin, and shifted off the books. Lending expanded, and banks still booked profits.

With this new technology, a bank could originate $100 million in loans, sell off some to investors, transfer the rest to a special-purpose entity and not have to hold any capital.

"The banks could turn a low return-on-equity business into one that doesn't use any equity, [which, theoretically, means the return on equity could be infinitesimal] which was the motivation for this," said Brad Hintz, a Sanford C. Bernstein & Co. analyst and former chief financial officer at Lehman. "It becomes almost like a fee business because it requires no capital."

The strategy was detailed in Ocampo's 282-page book ``Securitization of Credit: Inside the New Technology of Finance,'' which he co-wrote with McKinsey consultant James Rosenthal. Ocampo, who received an MBA from Harvard after graduating from the Massachusetts Institute of Technology, and Rosenthal, a Harvard Law School graduate, argued that banks could be more profitable if they used securitization.

The authors examined six of the first asset-backed transactions and gave readers a step-by-step guide for how to repeat them. They said that banks that didn't embrace the new technology would be at a disadvantage, and they predicted it would become the dominant form of financing.

"You basically needed good computers and distribution. You can always buy a Fannie, Freddie or Ginnie Mae pool. You just go online and buy it. You can't buy a Ford Motor Credit deal, because you have to know people."

As securitization caught on, borrowing increased. U.S. consumer debt tripled in the two decades after 1988 to $2.6 trillion, according to the Federal Reserve. Foreign banks used the new technology to expand lending, seeking borrowers on their home turf.

"One of the things the United States exported overseas was a debt culture," Haley said.

While consumers were snapping up credit cards, Nicholas Sossidis and Stephen Partridge-Hicks at Citibank in London were figuring out a way to sell the new bonds. Their solution: Alpha Finance Corp., the first off-balance-sheet structured investment vehicle, or SIV.

Alpha was created in 1988 as a way for Citibank, and later Citigroup Inc., to vertically integrate its business like an oil company. The raw material was found in a loan, refined into a security, then sold to a SIV at a profit.

Citigroup, formed in a merger of Citicorp and Travelers Group Inc., which owned asset-backed pioneer Salomon, also got a new product to sell: capital notes that boast returns of more than 20 percent a year. Owners of these notes receive all the excess return when borrowers pay their bills on time, though they are the last to be paid when times get hard.

By 2007, Citigroup's SIVs had $90 billion of assets, equal to the stock market value of PepsiCo Inc., making up about one-fourth of the entire SIV industry.

In 2003, the bank was sued by creditors of Enron Corp. for its role in setting up entities that enabled the Houston-based company to move assets off the balance sheet for Chief Executive Officer Jeffrey Skilling. Citigroup paid $1.66 billion in March to settle the lawsuit. Skilling, a former McKinsey consultant, was convicted of accounting fraud and is serving a 24-year prison sentence.

Starting around 2005, securitization began to rely more on short-term money-market funds for financing. This was especially true for securities made by pooling other bonds, known as collateralized debt obligations, or CDOs. Investors were loath to buy long-term debt of issuers that didn't have a track record, so new issuers sold asset-backed commercial paper that matured in less than a year. While money markets are the cheapest way to finance, they can also be the most dangerous for borrowers because they can mature as soon as the next day.

SIVs, banks and CDOs sold trillions of dollars of asset- backed commercial paper between 2005 and 2007 in maturities ranging from nine months to overnight. In the U.S., the amount outstanding marched higher almost every week beginning in April 2005, peaking at $1.2 trillion for the week ending Aug. 8, 2007.

Once money-market funds began to be tapped for financing, Ocampo said, ``it created a huge appetite for high-yield assets, far more than could be originated on a sound basis.''

To accommodate the demand, banks funded more subprime mortgages, with an average life of seven years, replacing car loans with an average life of three years and credit-card bonds paid off within 18 months.

Among conservative lenders, that rang an alarm: Bankers are taught to avoid such mismatched funding, in which a lender has to pay back money before the borrower has to pay the principal.

"Most of the terrible things happening now are because of the presence of money-market assets, taking what used to be long-term funding and making it short-term," Bruce Bent, 71, who started the first money-market fund in 1970, said in an interview in July.

Monday, October 27, 2008

How about 25 out of 152?

About a year ago, Guambat asked, How many exceptions break the rule? He was referring to the accepted rule of the day that America's subprime problem was contained to the US and the Lucky Country would well and truly be spared. The exceptions he pointed to were 2 local councils who were deeply in debt because of certain "investments" they made through Lehman Bros., those sterling characters who even the US Government refused to bail out.

Well, Guambat reckons the rule has well and truly been broken by the exceptions:

THE global economic crisis is financially hurting up to 25 local councils in New South Wales and some face possible bankruptcy, says the NSW Local Government Association (LGA).
LGA president Genia McCaffery says both metropolitan and rural councils are exposed to the collapse of US investment house Lehman Brothers. Many Australian councils had bought triple-A rated collateralised debt obligations (CDOs) backed by US subprime mortgages from Grange Securities, which was later bought by Lehman Brothers.

Ms McCaffery said up to 25 of the 152 local councils in NSW were exposed

"When you look at the raw figures there's quite a large exposure, but they've got a strong rate base and good capital reserves so they could probably weather the storm," Ms McCaffery told AAP

From dodging the bullet to weathering the storm in 11 short months.

See, also, FBI Probe of JPMorgan Fees Focuses on Swaps Roiling Muni Debt
a little-known part of the largest bank in the U.S. made a tidy profit peddling a different kind of corrosive debt to hundreds of counties and school districts earlier this decade.

As the credit crunch froze lending globally, causing stock markets to plunge, local officials who say they trusted JPMorgan faced a crisis of their own. Wall Street's drive for profits over the past decade has backfired on towns, cities and counties that borrow in the $2.7 trillion municipal bond market.

Financings arranged by JPMorgan and other banks are forcing hundreds of public agencies to spend billions of dollars they don't have to pay for increased interest payments and penalties.

These come in municipal bond and derivative deals that have turned poisonous. Unlike JPMorgan, which has benefited from federal bailouts, the towns and schools the bank has financed have received no help from Washington.

In the midst of the Wall Street collapse, JPMorgan and Jamie Dimon, its chief executive officer, have stood as pillars. The bank helped the Federal Reserve bail out a tumbling Bear Stearns in March, as the U.S. Treasury pledged $29 billion to Dimon's firm to cover losses.

Behind the glow of favorable publicity in which JPMorgan has basked, its municipal derivatives unit has operated in obscurity. The financings it arranged have sparked lawsuits from local governments alleging fraud. The muni derivatives unit has become snarled in the largest-ever criminal investigation of public finance by the Department of Justice.

On Sept. 3, JPMorgan shut down its unit selling debt derivatives to municipalities because the risks outweighed the profit.

In these deals, which were rarely put out for public competitive bidding, the bank said its clients would come out ahead if interest rates increased in the future.

JPMorgan and other banks have turned away from traditional, competitively bid, fixed-rate municipal bond sales in the past decade.

Fees banks collected for selling bonds that build roads, schools and hospitals dropped 25 percent to $5.27 for every $1,000 of debt in 2007 from 1998, as fixed-rate bonds became like commodities dropping in sales value. Banks found they could charge 10 times as much for selling municipal derivatives, public records show.

If local authorities had stayed with old-fashioned, fixed-rate municipal bonds for financing, they wouldn't be facing the rate blasts hitting them today. But banks realized that plain-vanilla municipal bond sales didn't make them enough money, says Steve Kohlhagen, former head of debt derivatives at Wachovia Corp.

"It just wasn't a very profitable business, but the derivatives part was," says Kohlhagen, who retired in 2002. "So we kept a minor presence in bonds. The reason was the derivatives."

Using derivatives, JPMorgan pitched a host of deals whose names alone are indecipherable. For Philadelphia International Airport, the bank sold something called a "path-dependent knock-out swaption."

The seeds of JPMorgan's municipal derivative deals were planted in the late 1980s. In 1987, the Fed relaxed provisions of the Glass-Steagall Act, the Depression-era legislation that prevented commercial banks from underwriting corporate securities and many types of local bonds.

The decision, which followed requests from Bankers Trust Corp., Citicorp and JPMorgan, allowed all banks -- not just securities firms -- to expand their sales of public debt.

That article is absolutely chock a block full of the details of what can only be described as scandalous. If you are a local rate-payer, municipal employee or anyone else concerned with the financial health of your local county, council or school district, you owe to yourself to read the article.

July 23, 1995 and ... You Are There

In the 1950s, Walter Cronkite hosted a CBS-TV program that used real network correspondents to report events from days well before radio or TV in the style of "live" television news. Called You Are There,* the program taught history -- and had a secret history of its own. All the writers were victims of the McCarthy-era blacklist. They used the tales of Joan of Arc, Galileo and other historical figures to make thinly disguised points about contemporary witch hunts. (From NPR)

This is worth waiting through the 32 seconds of advertisement.

Hattip: Barry Ritholz

Brings to memory the sage observation of JY from his comment to Guambat's post on October 19:
When the wise guys started using particle physics to design hedge transactions, the free flow of knowledge went poof.

Mulling that whine about the untrustworthy dollar

Guambat has stewed over the weekend about that "untrustworthy" US dollar story coming out of China. How are we to take it?

On its face, it would seem to be a harbinger of dollar dumping, particularly by China. Should we be fearful of a run on the US dollar?

Guambat doesn't have a clue, but wonders, if you sell dollars, what do you buy to replace it? As that prior post noted, even China recognizes the structural limitations of dealing with a fractious European Community and its Euro currency. Is the world really at the place where it is willing to put its stores of value on the Euro? Without the knowledge to reject or embrace the idea, Guambat is dubious.

So, what, the Yen? It's strong, at least against the Greenback and at least at the moment. But how do you have the confidence of a currency whose economy has been running a zero percent interest policy for nearly a decade, whose currency has chiefly been appreciated (to use the word correctly in one sense and wrongly in another) more for its carry trade than its intrinsic value, and whose stock market is only a quarter of its value of a generation ago, and whose politics, while engaging at the macro world level can hardly be characterized as possessing leadership, and whose defense strategy is based on a constitutional policy of what is in essence isolationism?

Again, Guambat is dubious.

So, the Chinese Yuan, maybe? Given its recent emergence, its state-run history and its undemocratic "tendency", even granted it will become a world economic power, perhaps, and perhaps before this century is out, is the time ripe for the Yuan? Again, dubious.

Maybe the Euro-Asian connection will try to take the US Dollar out behind the Bretton Woodshed for a bit of a gilt-edged make-over? Again, Guambat is doubtful that, first, without the active support of the US that dog has legs, and, second, even a basket approach will accept a basket-case dollar. At least one qualified observer (certainly more so than Guambat) has objected to saluting that flag if it is run up the flagpole.

For now, it seems, there is no viable replacement, so why would the Chinese leadership allow such a canard to run in such an obviously provocative piece?

So far, the only idea Guambat can come up with, given his God-given limited resources, is that this is just another convenient and opportunistic weight to place on China's side of the scales as it continues to negotiate its own way with the rest of the world. If so, maybe it is only an idea whose time has not yet come.

We'll see. Meanwhile, your thoughts and contribution might possibly be welcomed, depending on how similar to a manufactured luncheon meat it presents itself. (Not to disparage the real, fair dinkum Spam itself, as Guam folk are proudly known to have some affinity along those line.)

Alaskans for an Independent Palin?

A article raises the question in Guambat's mind whether there is a AIP (see title) movement afoot. Though nasty things have been said over Sarah's relationship to the Alaska Independence Party, this is not that. Well, not exactly.

This event is, perhaps, more in the nature of the broader blame game allegedly going the GOP rounds.

The article says,
stirrings of a Palin insurgency are complicating the campaign's already-tense internal dynamics.

Four Republicans close to Palin said she has decided increasingly to disregard the advice of the former Bush aides tasked to handle her, creating occasionally tense situations as she travels the country with them. Those Palin supporters, inside the campaign and out, said Palin blames her handlers for a botched rollout and a tarnished public image — even as others in McCain's camp blame the pick of the relatively inexperienced Alaska governor, and her public performance, for McCain's decline.

a senior Republican who speaks to Palin, said Palin had begun to "go rogue" in some of her public pronouncements and decisions.

"I think she'd like to go more rogue," he said.

The emergence of a Palin faction comes as Republicans gird for a battle over the future of their party

"These people are going to try and shred her after the campaign to divert blame from themselves," a McCain insider said

But other McCain aides, defending Wallace, dismissed the notion that Palin was mishandled. The Alaska governor was, they argue, simply unready — "green," sloppy and incomprehensibly willing to criticize McCain for, for instance, not attacking Sen. Barack Obama for his relationship with his former pastor, the Rev. Jeremiah Wright. [Palin has her own Rev. Wright in the name of Joe Vogle, and perhaps McCain was wise enough to realize such an attack could backfire, or perhaps he understands that two wrongs don't make a Wright.]

"She was completely mishandled in the beginning. No one took the time to look at what her personal strengths and weaknesses are and developed a plan that made sense based on who she is as a candidate," the aide said. "Any concerns she or those close to her have about that are totally valid."

But the aide said that Palin's inexperience led her to her own mistakes:

"How she was handled allowed her weaknesses to hang out in full display."

If McCain loses, Palin's allies say that the national Republican Party hasn't seen the last of her.

Sunday, October 26, 2008

"The U.S dollar has ceased to be trustworthy..."

That quote is from an opinion piece in the People's Daily Online, English Edition, of the Chinese main media voice, Asia and Europe join hands to tackle challenges. Other excerpts follow:
Currently, the exacerbating global financial crisis has plunged the entire world into a wretched plight, where assorted global issues, such as energy problems, climate change and food safety are interwoven, and unprecedented challenges are confronting the international community.

the U.S-born credit crunch set up a new round of world-wide financial crisis. It is evident that only a joint effort from Asian and European countries and the international community as a whole can succeed in overcoming current difficulties, maintaining the stability of the international financial market and promoting sound development of the global economy.

The EU summit concluded on Oct.16 strongly advocated that a new Bretton Woods system should be put in place in a bid to fortify the monitoring mechanism over the international financial market

Currently, almost all the countries from across the world have to take toll and risks for the simmering financial crisis induced by the U.S sub-prime mortgage crisis, while the U.S, the trouble maker, is tucked away under the protective umbrella, and well shielded by its fat interests. People woke up from the general panic to realize that the U.S is, by taking advantage of its dollar hegemony, grabbing the global wealth, and the U.S dollar has ceased to be trustworthy as before. Therefore, the dollar-pegged payments in the international trade transactions must be shattered, and a more democratic and legal international monetary institution is on the point of coming out at the global call.
China is also known for its largest foreign exchange reserves and fastest economic growth. Back in case of the U.S-born financial storm, China is acting as the largest creditor to the U.S and also the victim to bear the brunt of the attack.

Also note this Reuters story on what looks to be the same topic.

China has also taken a bit of a slighted whack at the Europeans, with whom they this weekend concluded a financial crisis confab.

First, the whack, from Xinhua news:
Europe has become a big victim in the financial crisis, which originated in the United States. As European banks are still struggling with tight credit triggered by the U.S. sub-prime mortgage defaults, Europe learned it can hardly be separated from the United States.

Due to the close trans Atlantic financial ties, any problems in the U.S. financial market may soon spread to Europe. In some cases like the current financial crisis, Europe was even under a risk of paying more than the United States since it is difficult for the EU, composed of 27 individual countries, to react as quickly as Washington.

That is why when the Bush administration put forward a 700- billion-dollar rescue package shortly after the outbreak of the latest financial storm, each EU member state was fighting on its own. Their fragmented response had been a source of concern for the stumbling markets.

Fortunately, EU countries finally got untied at their autumn summit last week, adopting the same toolbox of measures to deal with the crisis, which was largely modeled after the British rescue package designed by British Prime Minister Gordon Brown.

EU leaders apparently blamed the financial crisis on the failure of free-market capitalism in the United States.

"The financial crisis is not the crisis of capitalism. It is the crisis of a system that has distanced itself from the most fundamental values of capitalism, which betrayed the spirit of capitalism," Sarkozy said in a recent speech.

"We must reform capitalism so that the most efficient system ever created does not destroy its own foundations," he said on Saturday in a speech when he visited Canada.

And now, one of the key points of agreement to come out of the weekend Euro-China summit, ASEN:
5. Leaders were of the view that to resolve the financial crisis it is imperative to handle properly the relationship between financial innovation and regulation and to maintain sound macroeconomic policy. They recognized the need to improve the supervision and regulation of all financial actors, in particular their accountability.
If the Bush Doctrine had been one of pre-emptive regulation rather than pre-emptive shadow-boxing, we wouldn't be in this situation.

But as it is now, the world leaders had better be very wary of using "regulation" responsibly and not as some disguised weapon of protectionism. From most accounts, the Great Depression was as deep and contagious as it was because of nationalistically competitive protectionism. So far, all the right words are being spoken; let's just be aware of what the actions turn out to be.

This topic continues in Mulling that whine about the untrustworthy dollar

The Four Horsemen of this financial Apocalypse

Guambat reckons that it took four ferocious and independent minded horsemen to bring about this financial apocalypse, but the context of a fearless new Millenium (notwithstanding FY2K and 9-11), and the pandering old political system were essential ingredients giving these horsemen added potency:

1. A "clubby" and feckless US Central Bank that refused to understand and keep rein on the commonly accepted human nature propensity to take risk to the limit if it can be off-loaded on anyone else, especially the unknowing and unsuspecting;

2. An over-achieving dogmatism that understood that government is ill-suited to undertake the price, product and production discovery that is necessary to achieve a dynamically efficient economy that produces the greatest wealth for the greatest number, but failed to even consider that unfettered private enterprise is equally ill-suited;

3. A referee, in the character of the ratings agencies, that was too easy prey to the payola that has destroyed "professional" sports since time immemorial; and,

4. An elite group of highly educated technocrats who understood too well the inner workings of the institutions set up to police the financial playgrounds of big money to the end that they were able to easily and diligently and with malice aforethought work their ways around the existing structural frameworks, cow the institutions with authority, and create their own fantasy land of eternal wealth.

In the fourth category, Guambat would relegate Citadel, and most other hedge funds. Citadel was one of the first to ring the alarm bells that all was not right with their immaculately conjured world.

Citadel was entangled in one of the first major hedge fund blow-ups, Amaranth. Remember Amaranth? To refresh your memory, have a quick look of this.

Amaranth was, in turns out, not an aberration but more of a blue-print of how these things work. Or, rather, how they don't work when the guys who dream this stuff up wake up to find out that they don't always work to plan, which they fail to plan for.

Anyway, Citadel had a deep and meaningful relationship with Amaranth and its fall-out.

But Citadel was no light weight character to be pushed around by the amateurs at Amaranth. It was big enough that it's trading influence extended to being as much as five percent (5%) of US equity trading.

Now, Guambat reckons that anyone who has the capacity to affect 5% of the US equity market is no longer a "player" or "participant". Such a power is a market maker, not a market taker. Any such concentration of power ought, in Guambat's construct of a more perfect union, to have a full time cop on the beat. And, to digress to a subject that has struck Guambat as possibly significant, Guambat has noted that areas of law, such as "securities regulation" and "anti-trust", which were high on Guambat's list of preferred coursework over a quarter of a century ago, seem to hardly rate a discussion group in today's blawgs and Supreme Court agenda.

In an attempt to try to gain perspective, Guambat once postulated that "the view from a citadel is somewhat different than the view of a citadel, and that the difference in perceptions would make for somewhat differing assessments of the world at large."

In that post, which was way back in February 2006, Guambat recounted that Citadel was intending "to issue $500m (€385m) in bonds, which will make his $13bn hedge fund less reliant on Wall Street for financing". Such a financing deal would put Citadel beyond the realms, bailiwicks and coppers of banking and any other regulatory reach, let alone transparency to the rest of the world.

In the article recounted, Guambat plagiarized,
Citadel is one of the most self-sufficient hedge funds in the world. It has secured its capital by locking investors into its funds for three years, while its focus on investment automation has helped free it from dependence on investment staff. It conducts marketmaking in options and last week tried to buy a licence to a hedge fund database to give it insight into rivals’ trading strategies.

The $500m in bonds Citadel plans to issue will cut its reliance on banks for financing and reduce margin call risk, which brought down Amaranth Advisors in September and Long-Term Capital Management in 1998.
So, how has that worked out so far?

Citadel Seeks to Reassure Debt Holders
Rumors continued to circle about losses at hedge funds, which collectively control some $2 trillion in assets world-wide.

The rumors were so acute for Citadel that its chief Kenneth Griffin held a conference call Friday afternoon for holders of $500 million in Citadel debt.

Mr. Griffin and chief financial officer Gerald Beeson reminded bondholders that more than 30% of Citadel's capital is in cash and Treasurys and it has another $8 billion in unused financing lines.

"I've never seen a market as full of panic as we've seen in the last seven or eight weeks," Mr. Griffin said on the call.

Citadel in recent days has repurchased as much as 20% of its debt held by outside investors, according to a person familiar with the transaction.

The 40-year-old Mr. Griffin oversees some $16 billion in assets, and is having the worst year of his career. As of a week ago, his main funds were down 35% during 2008.

Citadel said its bets on convertible bonds, bank loans and investment-grade bonds were hedged with credit-default swaps, or insurance-like contracts that allow investors to bet on the prospects of companies' debt.

The historical relationship between securities held by Citadel and the value of derivatives tied to those securities has seen a "tremendous dislocation" that rendered those hedges ineffective and "rewriting the world of finance in less than eight weeks," Mr. Beeson said.
Hedge Fund Withdrawals Stress Market; Citadel Reassures Clients
Hedge funds are aggravating the worst market selloff in 50 years as they dump assets to meet investor redemptions and keep lenders at bay.

U.S. hedge-fund managers may lose 15 percent of assets to withdrawals by year-end while their European rivals shed as much as 25 percent, Huw van Steenis, a Morgan Stanley analyst in London, wrote yesterday in a report to clients. Combined with investment losses, industry assets may shrink to $1.3 trillion, a 32 percent drop from the peak in June.

"I have never seen a market as full of panic as I've seen in the last seven or eight weeks," Kenneth Griffin, founder of Citadel Investment Group LLC, a Chicago-based hedge-fund firm, said yesterday.

Citadel, addressing investor concerns that its funds may be forced to liquidate, said yesterday it has $8 billion in untapped bank credit, 30 percent of its assets in cash and "modest" client redemptions.

The firm had no material losses from trading partners as its main Wellington and Kensington funds fell about 35 percent this year through Oct. 17, Chief Operating Officer Gerald Beeson said on a conference call with bondholders. Year-end redemptions will be a "few percent" of assets.

Griffin, 40, who started Citadel in 1990, has posted the biggest losses of his career in 2008 after increasing wagers on loans and bonds before the markets plunged.

Most of the funds' declines occurred in the four weeks after Lehman Brothers Holdings Inc. went bankrupt, Beeson, 36, said.

Citadel was betting that the gap between the default swaps and the bonds would narrow. Instead, they widened as lenders left the market and investors bet that more companies would default.
Guambat reckons that the more of these horsemen are made headless, the better. Guambat would, however, caution that the horses not be harmed in the making of that movie.

If these horsemen operated in an accountable, risk-assuming (rather than buck-passing), and transparent way, Guambat is prepared to accept that there is a role for them to play on the modern financial market pitch.

But if they insist on being the warrantless Ninjas of some shadow world, where lights don't shine because they are too far up someone's hiney, then Guambat reckons the world will be a better place without them.

Friday, October 24, 2008

If you're happy and you know it, vote McCain (Nixon, Ike, Bush, etc.)

A Happiness Gap: Doomacrats And Republigrins

It seems Republicans have polled happier than Democrats for decades, in "good" times and "bad", since the pollsters first thought to ask. Everyone has an idea as to the reason why, it would seem, but there has not been a study to confirm any of the guesses.

Says the article,
Government-funded researchers identified the happiness gap in 1972. [Guambat reckons the Repubs would be unhappy about that, too, but maybe not.] Since then, the Democrats have been comparatively more bummed out not just during the tenures of GOP presidents Ford, Reagan, Bush and Bush. They were noticeably less joyful than Republicans even during the GOP fiasco of Watergate, and during the Democratic Carter and Clinton administrations.

When you control for all the other variables, Taylor says, a Republican is 13 percent or 7 percent more likely to be very happy than a Democrat, depending on which regression analysis model you use.

The hypothesis: Those who think they can control their destinies are happier.

It turns out the happiness gap is not just an American phenomenon. In country after country, happiness studies find that "conservatives" are happier than "liberals."

They seem to be two species, with differently encoded DNA. The unequal balance-of-joy conjures hoary stereotypes: The jolly conservative, self-satisfied in his success, a doer not a doubter. The angst-ridden liberal, guilty in his success, a searcher not a finder.

Also: Extremists are happier than moderates, Brooks has concluded. Hard-core liberals are the happiest liberals and hard-core conservatives are the happiest people on Earth.

So, if you wanna be happy for the rest of your life, ...

Monumental disaster in the making?

(* See note below on photo.)

This is one of those cases where the kneejerk reaction seems to knock some people senseless. So proceed with caution and strap your knees down first.

The context of this case would normally lead the kneejerks to proceed cautiously and skeptically, but the visceral appeal of the subject matter cuts right through the thinking cap. It's exactly how magic is performed on stage.

The context is this: with Bush about to relegate himself to the history writers, he's set about to pre-write his legacy. This whole thing is about an attempt to put an environmental blue wash on the gross failings of his administration.

This is all about Bush's legacy.

And you think he didn't learn a thing or two from Al Gore?

Yes, and the respected but blinkered Pew Foundation has bought into the blue-wash so blindly, that it doesn't even see the irony in their labeling of the event as a "Global Ocean Legacy".

Ok, so what is this event? It is one noble in concept, depending on which end of the telescope you view it from. It is a plan to totally sequester great swaths of the Pacific Ocean over which the US claims sovereign domain from all economic activity.

And what's so wrong with that? Well, "economic activity" includes all fishing of any description, and one description of fishing in great swaths of the Pacific Ocean is "subsistence".

You see, the people who live on most of these so-called isolated islands have done so for thousands of years and fishing is what sustains them. And most of the fishing is not done by standing on a pier, but from outrigger canoes.

In fact, the tradition of much of the Pacific Islanders, particularly in Micronesia, is to roam the Ocean, much like the Plains Indians roamed the great prairies of North America, in search for food from the sea for which to feed, not only themselves, but their family, clan and village, and even to use as trade to the "high" islanders.

While much of the fishing is done in small one and two man boats close to shore, It is part of this tradition that islanders, and particularly those with no lagoon or reef, will often, even today, set off it their small outriggers and temporarily set up shop on small, unpopulated islands, to fish and prepare stores of sea foods to take back with them, sometimes staying for many weeks away in these isolated areas.

And, while what passes for the "big smoke" in these islands, being the main capital centers such as Guam, Saipan, Kosrae, Pohnpie and so on, have improved their technologies and scale of operations somewhat, they are in no way comparable to modern industrialized shipping operations, either in scale, technology, market or otherwise.

So, the effect of this monumental legacy leg-up for Bush is to deprive the people of the affected Pacific Islands of access to much of their "hunting grounds".

It is equivalent to condemning, say, a quarter of America's fertile farmlands to be set aside as nature preserves.

And to underline the political will behind this event, it should be noted that the original areas intended to be included in this plan involved areas off-shore from Alaska and elsewhere that contained oil industry assets, and these areas have already been taken out of the plan.

To make matters worse, this is a plan that is being rushed through in the dying days of the Bush administration as Executive Action. There is no Congressional involvement, and scarcely any consideration of local sentiment, which is running strongly against the plan, to the extent it impedes traditional uses and overrides traditional notions of sovereignty and local control.

So, Guambat encourages you to look at the situation with an open, skeptical and sensitive mind, and not be guided by your knees.

Guambat hails the concept of protection of the marine resources, but thinks that it should not be done in a rushed manner that threatens the cultural resources of the Pacific Island people. In Alaska, Australia and elsewhere, worthwhile conservation efforts are conducted in a manner that takes into account the ancient uses of the resources. The ancient uses did not bring those areas into near catastrophe and should not be punished by attempts to clean up from the modern uses which did bring about the damages.

If there are to be Pacific Island Marine reserves, and Guambat favours the notion, they should be established sensibly and not in some mad rush to polish Bush's rotten apple.

Suggested reading:
Bush Eyes Unprecedented Conservation Program
Letter to the Editor: A perspective on the Pew proposal
Bush proposes protections for Pacific islands, atolls
'Federalization' of Pacific waters
Gov’t urges Bush to reject monument proposal
editorial: Oppose the Marianas Monument

* Guambat cruised through a variety of Pacific Islands this year from Fiji to Guam. It was noteworthy that, even on big islands like Guadalcanal, the first people usually seen from the ship when approaching an island were single fishermen in their little boats.

This photo was taken on Ifalik Island and Lagoon, in Yap State, Federated States of Micronesia. Scenes such as these were captured by others, such as this and this, and Guambat can vouch that this is similar to what he saw just a few months ago.


26 Oct: Guam fishermen caught on to the downside to this issue a bit late in the game, and are trying to play catch-up in their efforts to maintain access rights to their southern fishing grounds. See Bush plan to restrict fishing:
Manny Duenas, with the Guam Fishermen's Co-op, said based on Hawaii's experience, a similar designation of a portion of Hawaiian waters restricted fishing to the extent that fishermen there could go out to monument-designated waters only on traditional boats, such as canoes.

And the Hawaiians were restricted from bringing their catch from the monument-designated waters back to their families, Duenas said.

If that occurs on Guam, prepare to see locally caught fish disappear from local store shelves and dinner tables, Duenas said.

Instead, people would be opening canned tuna or paying for more imported fish, he added.

29 Oct: 'Antiquities Act the wrong tool'
Rep. Madeleine Bordallo (D-GU) is urging the White House to conserve the waters around the CNMI's northern islands under the National Marine Sanctuaries Act, a statute that requires public and business sector consultations on management issues, rather than unilaterally designating the region as a national monument.

“I view retention of local flexibility to manage our marine resources in a way that balances the protections needed for sustainable marine resources with a thriving economy as an important sovereignty issue,” she writes. “The process in place under the National Marine Sanctuaries Act, which involves formal public consultation of stakeholders, is a far better process that could be used to assess the merits of these proposals.”

Bordallo adds that local fisheries should remain under the control of the Magnuson-Stevens Act, which regulates fisheries, and regional fisheries management councils.

“In short, where local conservation efforts have proven successful, I believe we should employ existing administrative processes that provide a proper role for ongoing local involvement in the management of our precious marine resources,” she writes. “I am extremely concerned that the process that is being employed now, in the last weeks of the Bush Administration, does not provide for adequate public input, let alone adequate congressional oversight.”

Thursday, October 23, 2008

More gain from the pain

A couple of years ago, Guambat noted how some savvy financial types were using derivatives and other financial products to bet against the subprime market. These were more macro plays on the big picture. Guambat has also mentioned John Paulson who made billions on a similar bet, and others like him, in another post earlier this year.

Now the stories are getting down the the nitty-gritty on the ground. From the macro view to the man-on-the-foreclosure-street view.

The WSJ provides a guide, a "how-to" if you will, for the average Joe who may or may not be a plumber:

How to Buy a Foreclosed Home
For anyone wanting to take advantage of today's buyer's market, distressed properties offer the best chance to make a killing. But you need good credit or ready access to cash, and a taste for the hunt.

Here are some tips to get started: [Read the story if you're really interested to know]

But on the same date, in its own fair and balanced way, the WSJ also shares the pain that comes with that gain in :

California Home Sales Revive, But Not Without Intense Pain
Investors and first-time home buyers are snapping up foreclosed houses here, with the number of local sales up almost fivefold from this time last year. Across hard-hit California, sales volumes rose 65% in September compared with a year ago, said MDA DataQuick, a San Diego-based real-estate information service.

The bad news is that the latest round of sales is unleashing another round of pain in cities such as Los Banos, a commuter community in California's Central Valley.

In 2005, one local builder was selling three-bedroom homes for $300,000 -- more than three times what it asked for a similar design in 2000.

Claudia Pedroza and Veronica Banuelos were among the home buyers. In 2006, the sisters and their husbands bought new houses next door to each other in a subdivision surrounded by fields just outside Los Banos. Ms. Banuelos paid $350,000 and Ms. Pedroza paid $375,000 for similar four-bedroom homes with three bathrooms and cavernous living rooms.

Property records indicate that the Pedroza and Banuelos families took out loans for nearly 100% of the price from Bank of America Corp. In the Pedrozas' case, the bank worked with the national nonprofit Acorn Housing Corp. as part of a program to help first time home buyers. The home builder, Hovnanian Enterprises Inc., funded $12,000 or more in closing costs for each home.

A California state housing agency also chipped in a $11,200 loan toward the Pedrozas' purchase. Ms. Pedroza figured that with her husband bringing home $3,200 a month as a house painter, the family could afford the monthly mortgage payment of about $2,000. Ms. Banuelos, a college student, said the payments were affordable for her husband, who also had ample work as a house painter.

Ms. Pedroza lost her home to foreclosure when her husband's painting jobs vanished and the couple fell six months behind on their payments. The Pedrozas are now paying $750 a month to rent a two-bedroom apartment in downtown Los Banos, where their 10-year-old daughter and 11-year-old son share a room. Ms. Banuelos's husband also took a cut in house-painting hours, and the couple stopped paying their mortgage four months ago.

Mr. Knoff's house has traveled the arc of the local market. Built on vacant land in 2002, it sold for $280,000. Its original owner unsuccessfully tried to sell it in 2006 for $450,000. Mr. Knoff bought it out of foreclosure in March of this year for $320,000. Today, based on local sales, he figures the house is worth about $220,000.

"I am one of those troubled borrowers not making any mortgage payments," Mr. Sherman said. The 61-year-old shipping and warehouse supervisor refinanced his house in Los Banos two years ago for $365,000, spending much of the new loan on home renovations. Now, he figures, the house is worth $140,000.

Mr. Sherman said that while he can afford his payments, he had planned to sell the house in a year or so to supplement his retirement income. But now, he figures, he couldn't afford to live there as a retiree. So four months ago he stopped writing mortgage checks, setting the cash aside in his retirement savings. He says he's waiting for his lender to kick him out or to reduce his loan amount. He'd also be happy for the government to modify his loan.

"I don't deserve a bailout," Mr. Sherman said. "Will I take one? You are darned right I will."

Republican presidential candidate Sen. John McCain has proposed the Treasury spend $300 billion to buy up troubled mortgages and reduce the principal on the loans to reflect current values. Sen. Barack Obama opposes using taxpayer money to intervene in the housing market, advocating instead that the government pressure lenders to alter mortgage terms and change bankruptcy codes to allow judges to do the same. Congress has already passed the Hope for Homeowners program, which aims to put 400,000 borrowers in more affordable loans.

Where many see ruin, some sense opportunity. Michael Arpaia, an officer with the California Highway Patrol, just bought a foreclosed four-bedroom house -- valued at $400,000 two years ago -- for $160,000. He spent $25,000 to replace linoleum floors, carpeting and landscaping. He's renting the house to a local couple who lost their home in foreclosure.

With stocks falling, Mr. Arpaia is counting on the property's cash flow and appreciation to supplement his retirement nest egg. "My financial adviser says residential real estate is the safest investment right now," he says.

While local homeowners and world markets wait for resolution, Larry Frontella can't believe his fortunes.

Mr. Frontella grew up on a dairy farm here and worked for three decades as a local deliveryman. In 1993, he bought a new house in the established part of town for $163,000. Two years ago, he refinanced with a $376,000 loan, property records show. His mortgage was written by a unit of Golden West Financial, which was later acquired by Wachovia Corp.

Mr. Frontella paid off credit cards, paid for his wife's funeral and prepaid his own burial. He bought a $17,000 Harley Davidson. "I worked all those years, and felt like I had won the lottery and could take care of everything," he said.

But several months ago, Mr. Frontella fell behind on the $1,800 payment on his interest-only loan. The bank also demanded back payments that pushed his total bill to $2,400 a month. The 68-year-old said he figured he wouldn't live to pay off his home.

Foreclosure and eviction loomed on Sept. 30. But late last month, a local businessman stepped in and signed a contract to buy the four-bedroom house for $170,000. Wachovia will take the loss on the value of the original loan, according to people with knowledge of the home.

The buyer, who declined through his real-estate agent to be interviewed, let Mr. Frontella remain in the home. Mr. Frontella's new monthly rent is $1,100, well below what he paid as an owner.

Speaking from the driveway of the home he once owned, Mr. Frontella says he feels lucky. "I'm not saying it's not my fault," he said. "Now I'm a renter. What the heck."

As Jon Friedman says in his Media Watch column at MarketWatch,
Pearlstine [former WSJ editor] stressed the idea that the best narratives contained ample contradictions and conclusions (and the Journal still does it better than any newspaper today).


Guambat recently, and again, noted that Rupert Murdoch, owner of Fox News and the Wall Street Journal and much more, is probably more pragmatic than dogmatic when it comes to his politics. He has his preferences, but he's more hip-pocket than the great mass of punters who also tend to vote with the same motivation.

Thus, Guambat can't help but think, being a conspiracy culpable creature, that there is some kind of connection between the headlines (no details yet) hitting his news wire service that Bill O'Reilly, a MSM talking headhunter that riles Guambat more than most others, right up there with that other used car salesman, Lou Dobbs, who should be dobbed in for his own manufactured weapons of mass hysteria, is "resigning" from Fox News, though he will continue his bully-boy pulpit O'Reilly Factor for now, and the recent polls done by Murdoch's teams that O'Bama (sorry, Obama) is building a bigger voter base. His WSJ has Obama up 10 points over McCain and even Fox News has him up 9 Points.

As Guambat pastes this post up on the ephemeral webwall, hasn't said anything about O'Reilly. Guambat is sure that it will soon have something fair and balanced to spin about the subject.


O'Reilly extends Fox News contract
Bill O'Reilly, the combative commentator who hosts the most-watched show in cable news, has extended his contract with Fox News for another four years, the network said Wednesday.

O'Reilly will be making more than $10 million a year under his new contract, according to the Washington Post.

Wednesday, October 22, 2008

The making of Lehman-aid

As the old saying goes, when handed a lemon, make lemon-aid, and, today the holders of those toxic Lehman swaps settled up and took their licks.

Lehman's massive debt swaps settle smoothly
"The liquidation process for forward open commitments involving Lehman has been completed," said the Fixed Income Clearing Corporation, a unit of the Depository Trust & Clearing Corp., in a notice on its Web site.

It said it was "pleased to announce that no loss allocations will be imposed on [mortgage-backed securities division] member firms as a result of the liquidations of these forward trades."

The overall size of the payout was expected to be as much as $400 billion. But if the counterparties' offsetting trades are taken into account, the Depository Trust and Clearing Corp. had forecast that sellers of the protection may only have to cough up about $6 billion.

"It looks as though there was no major fallout from the settlement to member firms," said analysts at Action Economics.


That CPDO thingie again

A couple of years ago, Guambat began to take note of some of the credit instruments that were being concocted by financial wizards, named like alphabet soup. CDOs, CDSs, CPDOs and the like were all the rage.

Creating these things had a circus air about it as the market's marketeers drove these things higher and higher, into the stratosphere and, yes, walked blind folded, carrying frightened kittens, over the chasms between the buildings on Wall Street and Fleet Street. Why, you could hear the band play, the men hoot in admiration, see the children hide their eyes and the clowns, always the clowns, whipping up the enthusiasm.

Guambat doesn't and didn't know a toot about how these things were assembled or meant to work, but the hoopla over them seemed mighty darn peculiar. Like the smaller crowds around the snake oil salesmen in the side carnivals following the circus.

Of the CPDO, for instance, he said, incredulously, "the CPDO is a ten year triple-A bond paying LIBOR plus 200 bps which bowls strikes every time yet goes down the lane sort of like those wonky pet toys which roll haphazardly around the floor to amuse bored pussies".

Trying to understand those things, he turned to Felix Salmon, who, safe to say wishes he hadn't, said, "The whole point of AAA debt is that it doesn't default, even "in the context of a widespread credit event"."

Of course, Felix began backing off that high wire act almost immediately, saying, "John Dizard at the FT helps to clarify further just how these newfangled CPDO thingies work.... In other words, I was wrong."

Which is not to punch up Felix, but merely to illustrate that even a critical thinker as he could get caught up in the financial glamouratory of the moment. It's like an engineer creating something that shouldn't exist and won't work, but is enchanted by how his elegant contraption looks simply because, in the first case, he could piece it together, and, more importantly, some other fool would buy it. Like the US automobile industry since the 1960's.

In the event, Guambat was persuaded by Steve Waldman and not Felix Salmon, who also came to accept his arguments, which makes this blogging stuff just that more interesting. Steve said,
When banks use novel structured products to take on more risk than bank regulators anticipated [and declined to regulate, Guambat might add, when finally forced to anticpate], I am being forced to take that risk.... I bother to write about this stuff not because I am interested in the arcane details of a structured credit designed especially for bank investors. I write because I think the game is going awry, the odds of systemic crisis at the collapse of a credit bubble are growing, and CPDO-based regulation skirting is the latest little crack in the dam.

And like a mad-engineer's faulty bridge, the "structured credits" that the financial houses built and sold and packed our retirement funds with were riddled with fault: design fault, construction fault, and put to faulty uses under faulty representations.

Which brings us to this story of the latest collapsing bridge.

Trouble for Banks, Insurers May Lurk in Synthetic CDOs
Even as some lending markets begin to recover from last month's demise of Lehman Brothers Holdings Inc., the securities firm's default -- together with those of other U.S. and European banks -- is causing new dislocations in the multitrillion-dollar market for complex investments known as synthetic collateralized debt obligations.

As opposed to regular CDOs, which contain actual bonds, synthetic CDOs provide income to investors by selling insurance against debt defaults, typically on a pool of a hundred or so companies or individual bonds. Given the size of the market, synthetic CDOs can have a large impact: By various estimates, they have sold insurance on the equivalent of between $1.25 trillion and $6 trillion in bonds.

The problems with synthetic CDOs stem in part from the way they were made. In many cases, the banks that created the CDOs stuffed them with companies, such as Lehman and Iceland's Glitnir, that paid the highest possible return for their top-notch credit ratings. That made the CDOs more attractive, but also riskier, because they contained companies that the market perceived as more likely to get into trouble.

When investors attempt to get out of synthetic CDOs, they push up the cost of default insurance. That, in turn, raises the cost of borrowing for companies, which use the cost of default insurance as a guide when deciding what interest rate they must pay on new bonds.

That could mean trouble for banks, hedge funds and insurance firms around the world, which used synthetic CDOs as a way to invest in diversified portfolios of companies without actually buying those companies' bonds. Many synthetic CDOs contain a heavy dose of exposure to financial companies, including Lehman, U.S. thrift Washington Mutual Inc. and recently nationalized Icelandic banks Glitnir Bank hf, Kaupthing Bank hf and Landsbanki Islands hf.

As a result, the users of synthetic CDOs are facing a wave of credit-rating downgrades and outright losses, which are coming to light gradually as ratings firms pore over hundreds of individual synthetic-CDO deals.

Dealers are offering about 50 cents on the dollar or less for some pieces of synthetic CDOs that used to be rated triple-A, according to one trader. That is down from about 60 cents on the dollar only three weeks ago.

Perhaps the weakest link in the market are specialized funds, known as "constant-proportion debt obligations," that work much like synthetic CDOs but with one important difference: They use borrowed money, or leverage, to boost the returns they can provide for investors, a strategy that also magnifies losses.

CPDOs, for example, typically borrowed about $15 for every dollar their investors put in. They also contain safety triggers that force them to get out of their investments if their losses reach a certain level. Analysts estimate that most CPDOs reach those triggers when the cost of default insurance hits about the level where it is now.

Other specialized funds, known as "credit derivative product companies," borrow as much as $80 for every dollar invested, according to a recent report from Citigroup Inc.

If those funds are forced to exit from their investments, it "could wreak havoc on the marketplace," Citigroup analysts wrote in the report.

Note that the market already wreaks of havoc.

And would sir care for more havoc with your havoc?

And for a final word on this faulty engineering of structured debt and other financial wizardry, Guambat notes that one of the most Merlynesque of the wizards, KKR's Henry Kraviz, recently said
"Financial engineering is no longer viable".

Mind you, he didn't say it is or ever was faulty. He is just saying it is harder to make money now that people are paying more attention and debt is paying such higher rates of interest that such shenanigans are not "viable". That is, he just can't make as much easy money off the chumps as what he is used to doing.

Nevertheless, the WSJ was impressed at what passes in that world for "frankness", even if of the disingenuous sort:
It was a startling admission for a buyout king. Private-equity dealmakers normally wince when accused of making billions through mere financial sleight-of-hand. They create value, they say, by identifying companies with untapped potential, taking them private and revamping their operations.

But Mr. Kravis acknowledged an open secret of the buyout business: In the go-go years these firms made a chunk of their profits through quick flips and maneuvers such as "dividend recapitalizations" -- taking big cash payments out of the companies they owned by paying themselves a fat dividend. These payments totaled $51 billion in 2006 and 2007 combined, according to Standard & Poor's. They have now disappeared, with only $1.2 billion in dividend recaps year to date.

Staring in the face of a deepening recession, private-equity firms are now engaging in financial machinations of a different sort. Where once the game was about stripping cash out, now it is all about hoarding cash in portfolio businesses to keep them alive.

But their engineering tools have not been laid down:
Some companies are buying back their own debt at a discount to cut their interest bills. In other cases, companies are conserving cash by exercising options on so-called "payment-in-kind toggle" bonds that allow firms to pay interest in the form of new debt rather than cash.